Idle Facilities

When auditors enter your plant to review a proposal, assess the adequacy of your accounting system, or perform a floorcheck, he/she is trained to be observant about a lot of other things besides the task at hand. If a contractor does not offer the auditor a plant tour, the auditor will often request one. On the tour, the auditor will be making some sweeping assessments as to how much the facility is being used. Observations of significant unused or underutilized facilities will inevitably lead to auditor questions about your plans for those facilities. If you don't have good answers, you could find yourselves studying FAR 31.205-17, Idle Facilities and Idle Capacity.

Idle facilities are completely unused facilities that are excess to the contractor’s current needs. Idle capacity is the unused capacity of partially used facilities. It is the difference between that which a facility could achieve under 100 percent operating time on a one-shift basis, less normal interruptions, and the extent to which the facility was actually used to meet demands in the accounting period.

Idle facility costs are unallowable unless they are necessary to meet fluctuations in workload, or were necessary when acquired and are now idle because of changes in requirements, production economies, reorganization, termination, or other causes which could not have been reasonably foreseen. The allowability for the cost of idle facilities is generally limited to 1 year but this is one area where FAR specifically suggests that contractor's pursue an advance agreement with the contracting officer (see FAR 31.109).

Idle capacity costs are allowable provided the capacity is necessary or was originally reasonable and is not subject to reduction or elimination by subletting, renting, or sale, in accordance with sound business, economics, or security practices.

Be careful however. FAR states that widespread idle capacity throughout an entire plant or among a group of assets having substantially the same function may be the same thing as idle facilities. If so, the costs may be unallowable after a reasonable period (typically one year) in which to dispose of them.